Question

What are the factors that affect the breakeven point under (a) variable costing and (b) absorption costing?

1) Fixed (manufacturing and operating) costs.
2) Contribution margin per unit.
3) Production level in units in excess of breakeven sales in units.
4) Denominator level chosen to set the fixed manufacturing cost rate.

Answer 1

The factors that affect the breakeven point under variable costing include fixed costs, contribution margin per unit, and production level in excess of breakeven sales. The factors that affect the breakeven point under absorption costing include fixed costs, contribution margin per unit, and the denominator level chosen to set the fixed manufacturing cost rate.

Step-by-step explanation:

The factors that affect the breakeven point under variable costing are:

1. Fixed costs: Fixed costs play a significant role in determining the breakeven point. These costs do not change with the level of production and must be covered by the contribution margin.
2. Contribution margin per unit: The contribution margin per unit is the difference between the selling price per unit and the variable cost per unit. It represents the amount that contributes towards covering fixed costs.
3. Production level in excess of breakeven sales: The breakeven point is reached when the production level exceeds the breakeven sales level. Any further increase in production contributes to the company's profits.

The factors that affect the breakeven point under absorption costing are:

1. Fixed (manufacturing and operating) costs: Fixed costs are allocated to each unit of production under absorption costing, affecting the breakeven point.
2. Contribution margin per unit: Like in variable costing, the contribution margin per unit affects the breakeven point in absorption costing as well.
3. Denominator level chosen to set the fixed manufacturing cost rate: The denominator level chosen to set the fixed manufacturing cost rate may vary and can influence the breakeven point.